Structures and applicable lawTypes of transaction
How may publicly listed businesses combine?
A business combination involving a publicly listed issuer is generally structured as either a takeover bid or a court-approved plan of arrangement, but can also be accomplished through a statutory amalgamation, sale of assets or other fundamental corporate reorganisation.
In general, a takeover bid (the Canadian equivalent of a US tender offer) is an offer to acquire outstanding voting or equity securities where the securities subject to such offer, together with the securities already owned by the potential acquirer (and any person acting jointly or in concert with the acquirer), constitute 20 per cent or more of the voting or equity securities of the class subject to the offer. Certain limited exemptions from the takeover bid requirements may be available. However, all non-exempt takeover bids will be subject to the following requirements:
Equal treatment of shareholders
Bids must be made to all shareholders of the class of securities subject to the bid and all shareholders of the same class of securities must be offered identical consideration (which can include cash, shares or other securities or a combination, as well as an identical choice of consideration alternatives).
105-day bid period
Bids will be required to remain open for a minimum of 105 days, subject to two exceptions. First, the target issuer’s board of directors may issue a ‘deposit period news release’ providing for an initial bid period that is shorter than 105 days but not less than 35 days, in which case all outstanding or subsequently launched bids are only required to be open for not less than the shortened bid period. Second, the target issuer may issue a news release that it has entered into an ‘alternative transaction’, effectively a friendly change of control transaction that is not a bid, such as an arrangement, in which case all outstanding or subsequently launched takeover bids are only required to be open for 35 days from their date of commencement.
More than 50 per cent minimum tender requirement
Bids will be subject to a mandatory minimum tender requirement of more than 50 per cent of the outstanding securities of the class that are subject to the bid, excluding those beneficially owned, or over which control or direction is exercised, by the bidder and its joint actors.
10-day extension requirement
Following the satisfaction of the more than 50 per cent minimum tender requirement and the satisfaction or waiver of all other terms and conditions, the acquirer may take up and pay for securities tendered to, and not withdrawn from, the bid and the bid will be required to be extended for at least an additional 10-day period. This extension provides non-tendering shareholders a further opportunity to accept the bid.
Plan of arrangement
A court-approved plan of arrangement is a multistep transaction, subject to court approval, which may involve, among other things, an amalgamation, an amendment to the corporation’s articles, a transfer of property, an exchange of securities and a compromise with creditors. The principal disclosure document is the management information circular (also referred to as a proxy circular), which is mailed to the target’s security holders (and, in certain circumstances, the offeror’s security holders) in respect of the meeting called to approve the plan of arrangement. A plan of arrangement involves a shareholders’ meeting and two court appearances (one prior to the mailing of the management information circular and one subsequent to the conclusion of the shareholders’ meeting). The initial court appearance addresses procedural matters, such as the calling of the meeting, the class of securities that will vote on the transaction resolution, quorum and approval thresholds. The second court appearance addresses substantive matters, where the court may approve the arrangement as proposed or as amended by the court. In particular, the court appearance held following the shareholder’s meeting considers the fairness of the proposed plan of arrangement. The plan of arrangement becomes effective once the necessary documents, which include the final order of the court, are filed with the applicable corporate registry and, in certain circumstances, a certificate is issued by the corporate registrar in respect of the business combination.Statutes and regulations
What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies?
Generally, corporate transactions (including court-approved arrangements) are governed by applicable corporate statutes while takeover bids are governed by applicable securities legislation.
Canadian securities regulation is governed primarily by laws and agencies established separately by each of the provinces and territories of Canada. Canada does not have a federal securities regulatory agency, thus each province and territory has its own legislative framework and system that regulates, among other things, takeover bids; however, the rules have been largely harmonised and are generally very similar, if not identical, in most cases. Securities regulators generally have the power to intervene in transactions considered to be contrary to the public interest. Some provinces have imposed rules designed to protect minority shareholders in connection with certain types of ‘related party’ transactions (related parties include shareholders owning 10 per cent or more of the voting securities of an issuer), insider takeover bids and business combinations. These rules include requirements, in certain transactions and subject to the applicability of exemptions, for approval by a majority of the minority shareholders, the preparation and disclosure of valuations, and additional disclosure requirements.
Companies have the option to incorporate under the federal Canada Business Corporations Act or one of the largely similar provincial or territorial business corporations acts. Extraordinary corporate transactions (such as plans of arrangement and statutory amalgamations used to complete business combinations) must generally be approved by a special resolution of shareholders (typically two-thirds of the votes cast). Shareholders generally have dissent rights, provided for under the corporate statutes or by the court, in respect of extraordinary corporate transactions and the right to demand payment of the ‘fair value’ of their shares (as ultimately determined by a court, if challenged). Further, under Canadian corporate statutes, Canadian courts have been given broad remedial powers to intervene in respect of such transactions that are viewed to be oppressive or unfairly prejudicial to, or that unfairly disregard the interests of, shareholders and other stakeholders.
Canada’s senior equity exchange is the Toronto Stock Exchange, but other stock exchanges in Canada include the TSX Venture Exchange, which attracts small to medium-size issuers, and the Montreal Exchange, which focuses on derivatives trading. In addition, there are a number of alternative exchanges, including the Canadian Securities Exchange and the NEO Exchange. These exchanges may regulate certain aspects of business combinations. For example, the Toronto Stock Exchange requires a listed acquirer to obtain approval of its shareholders if the acquisition would result in the issuance of more than 25 per cent of the outstanding shares of the acquirer on a non-diluted basis or where a transaction would otherwise materially affect control of the listed issuer (generally where the transaction results in any one party holding 20 per cent or more of the outstanding shares of the acquirer).
Business combinations may be subject to a number of industry-specific regulatory laws, as well as laws of general application, including the Competition Act (Canada) and the Investment Canada Act (ICA).Cross-border transactions
How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions?
A Canadian plan of arrangement is often the preferred acquisition method where shares will be issued as consideration for the Canadian target’s shares. In respect of cross-border acquisitions involving Canadian companies with shareholders resident in the United States, section 3(a)(10) of the US Securities Act of 1933 (the 1933 Act) provides an exemption from the registration requirement for the issuance of securities if the issuance has been approved by a court of competent jurisdiction after a hearing on the fairness of the terms and conditions of issuance, of which all of the target’s security holders that may be arranged receive notice and have an opportunity to attend and be heard. The US Securities and Exchange Commission (SEC) has recognised that Canadian plans of arrangement satisfy the requirements of section 3(a)(10). As a result, a plan of arrangement is often used by acquirers if securities are being issued to any shareholders resident in the United States, since doing so permits the acquirer to complete the acquisition without filing a registration statement in the United States.
In addition, Canadian foreign private issuers generally are exempt from the SEC proxy rules. Therefore, the SEC proxy rules should also not apply.
Exchangeable share transactions also may be used in cross-border acquisitions involving a Canadian target company and a foreign acquirer using share consideration. The purpose of this structure is to provide Canadian resident shareholders of the target company with a tax-deferred rollover on the exchange of their shares of the Canadian target company for exchangeable shares of a Canadian acquisition company. A rollover is not available if the exchange is made directly for shares of the foreign parent, which may result in the selling shareholder realising a capital gain on the disposition. The shares of the Canadian acquisition company received by target shareholders are exchangeable at the holder’s option for common shares of the foreign public parent. This exchangeable share structure will normally defer the taxation of the capital gain until the shareholder sells the exchangeable shares or exercises the exchange right for the publicly traded shares of the foreign parent company.
The Canada-US multi-jurisdictional disclosure system (MJDS) provides that an eligible takeover bid made for a Canadian target company in compliance with Canadian requirements will generally also comply with US federal requirements provided that certain prerequisites are met. In particular, the MJDS provides that a takeover bid that is being made for a target company that is: (1) organised under the laws of Canada or any Canadian province or territory; (2) a foreign private issuer under applicable US rules; and (3) not an investment company registered or required to be registered under the US Investment Company Act of 1940, may also be made in the United States to US security holders in accordance with Canadian takeover bid requirements, provided that US holders hold less than 40 per cent of the securities of the class subject to the bid. Applicable MJDS rules and forms provide for the filing of Canadian takeover bid materials, wrapped in the appropriate MJDS schedule, to meet US tender offer filing requirements. If the consideration offered under the takeover bid includes shares, the acquirer must also comply with the registration requirements of the 1933 Act, and if applicable, the securities laws of certain states in the US. All bids must be extended to each holder of the class of securities in the United States and Canada upon terms and conditions not less favourable than those offered to any other holder of the same class of securities, and the transaction itself must be subject to (and not exempt from) the formal Canadian takeover bid rules.Sector-specific rules
Are companies in specific industries subject to additional regulations and statutes?
Certain industries, particularly those relating to national security or those that are classified as cultural businesses, are subject to additional regulations. In addition, certain legislation applicable to certain industries may specify a minimum of Canadian-resident ownership. For example, the requirements of the Canada Transportation Act that currently at least 75 per cent of the voting interests of Canadian airlines must be held by Canadians and the requirements of the Telecommunications Act (Canada) that at least 80 per cent of the voting interests of certain holders of radio authorisations and broadcasting licences be Canadians.Transaction agreements
Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements?
The governing law of a takeover bid is the law of each province or territory in which the shareholders of the target issuer reside, subject to de minimis exemptions, if applicable. The acquirer and the target may enter into a support agreement, which renders the transaction a ‘friendly’ takeover bid. The acquirer may also enter into ‘lock-up agreements’ with shareholders of the target, for the purpose of obtaining their commitments to support the transaction through tendering securities to a takeover bid or voting in favour of a proposed arrangement or amalgamation. These agreements are contractual in nature, and therefore there is no set rule to determine their governing law. In practice, the governing law is that of the jurisdiction in which the target is incorporated.
The governing law of transaction agreements for corporate transactions (in the case of a plan of arrangement, typically an arrangement agreement), is also a contractual matter, which may be negotiated. The governing law for such agreements is often the jurisdiction in which the target is incorporated or in which its principal place of business is located.
Filings and disclosureFilings and fees
Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions?
The form of business combination determines the necessary filings. In a formal (non-exempt) takeover bid, there are two main filings to be made with the applicable securities regulators: (1) the acquirer must file a takeover bid that describes the terms of the offer along with other required disclosure; and (2) the target company must file a directors’ circular, which is prepared by the board of the target company, and includes the target board’s recommendations concerning the bid, if any, along with other required disclosure. Also, if the terms of the takeover bid change, notices must be filed disclosing such changes.
In a corporate transaction requiring shareholder approval at a meeting, a management information circular and other supplemental materials must be filed with the applicable securities regulators. The content and timing of the filings must comply with the applicable statutory requirements. The fees payable in connection with these filings depend on the structure and size of the transaction and the federal and provincial jurisdictions involved.
Neither takeover bid circulars nor directors’ circulars filed in connection with takeover bids, nor management information circulars filed in connection with corporate transactions, are reviewed by securities regulators, though there is statutory civil liability for misrepresentations in those documents. If the consideration for a business combination includes the issuance of securities of the acquirer that are listed on a stock exchange, filings will need to be made with the appropriate stock exchange to obtain the necessary listing approvals. Fees will vary based on the stock exchange and the number of securities issued. In certain circumstances, an acquirer issuing securities as consideration for a takeover bid or other business combination may be required to obtain the approval of the acquirer’s shareholders.
If a business combination or acquisition of a company involves the acquisition of a business that has assets in Canada where certain revenue and asset value thresholds are met (generally, where the target company has a book value of assets in Canada or gross revenue from sales in or from Canada in excess of C$96 million and the parties and their affiliates have aggregate book value of assets in Canada or gross revenues in, from or into Canada in excess of C$400 million), the parties may not complete the transaction under the Competition Act until (1) the parties have filed a pre-merger notification and a statutory waiting period has expired (which is initially a 30-day period); (2) the Commissioner of Competition (the Commissioner) has issued an advance ruling certificate (ARC); or (3) the Commissioner has issued a waiver from the notification obligations and a no-action letter. The filing fee in respect of a pre-merger notification, ARC, waiver or no-action letter request is currently C$73,584. However, only one fee is required where a pre-merger notification is submitted together with an ARC request. To the extent the Commissioner has concerns that a transaction would likely result in a substantial prevention or lessening of competition, he or she may: (1) extend the waiting period during which the parties may not close the transaction by issuing a formal supplemental information request; (2) refuse to issue an ARC, waiver or no-action letter, as applicable; or (3) file an application with the Competition Tribunal to seek an interim order preventing the parties from closing the transaction to allow him or her time to complete his or her assessment, or to seek a remedial order to address such concerns.
Any non-Canadian acquiror proposing to establish a new business or acquire control of an existing business in Canada (including a business combination or acquisition of a public company) will be subject to the Investment Canada Act (ICA), which may involve a net benefit review or a national security review, depending upon the identity of the acquiror, the nature of the assets of the Canadian business, the structure of the transaction and the value of the Canadian business. If subject to a review, the parties may not complete the review until a determination has been made by the Minister under the ICA or the Canadian government. There are no filing fees under the ICA.
Canada does not have stamp taxes.Information to be disclosed
What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used?
The form of business combination determines the scope of public disclosure. A corporate transaction, such as a plan of arrangement, requires the parties to have agreed to the transaction and its material terms in advance of the public announcement by way of a news release of the transaction. Once terms are agreed and announced, the target company will prepare a management information circular, which is then filed with the governing securities regulators and mailed to shareholders of the target company. The management information circular will set out certain prescribed information with respect to the transaction including, inter alia, a description of the background to the transaction and the negotiation process that occurred between the parties and, more specifically, will include information that is material to the shareholders for them to make a reasoned decision to approve and vote in favour of the plan of arrangement or reject the transaction and vote against the transaction at a duly called and properly constituted meeting of shareholders. Where the transaction involves the issuance of the acquirer’s securities as consideration, the management information circular must include prospectus-level information, including historical and, in certain cases, pro forma financial information about the acquirer.
Takeover bids require the acquirer to file a takeover bid circular with the applicable securities regulators. The takeover bid circular must be mailed to shareholders of the target company. A takeover bid circular must contain certain required information, including:
- the terms of the offer;
- the acquirer’s intentions in respect of the offer, including a second-stage transaction, historical trading in the securities of the target company;
- the acquirer’s holdings of the securities of the target company;
- sources of financing for the offer;
- any arrangements between the acquirer and any director, officer or shareholder of the target company; and
- any other information that would be material to the shareholders’ decision to accept or reject the offer.
The takeover bid circular must include prospectus-level information about the acquirer, including historical and, in certain cases, pro forma financial information, if any securities of the acquirer are offered as consideration for the business combination. By way of response to an offer, directors of the target company must file a directors’ circular with the governing securities regulator and mail it to the shareholders within the prescribed time period. This circular contains certain prescribed information, including the directors’ reasoned recommendations as to whether the shareholders should accept or reject the offer to shareholders (or if no recommendation is made, the directors’ justification for that position), and outline the intentions of the directors and officers of the target corporation, to the extent they are known.
When the business combination involves a related party of the target company, certain additional information must be included in the disclosure documents (including, unless an exemption is available, a summary of a formal independent valuation of the subject matter of the transaction).Disclosure of substantial shareholdings
What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination?
When an acquirer acquires beneficial ownership of, or control or direction over, 10 per cent or more of a class of voting or equity securities of a public company, the acquirer becomes an insider of the public company for purposes of Canadian securities laws. Upon crossing the 10 per cent threshold, the acquirer must:
- comply with Canada’s early warning regime by promptly issuing and filing a news release (announcing its holdings in the public company, the purpose for which the securities were acquired and any future intentions to acquire additional securities of the public company) and, within two business days, filing an early warning report with the Canadian securities regulators in respect of the foregoing;
- honour a moratorium on additional purchases of securities until one day following the filing of the early warning report; and
- file an insider report on Canada’s System for Electronic Disclosure by Insiders (SEDI) publicly reporting the acquirer’s beneficial ownership of, or control or direction over, voting or equity securities of such public company.
Under the early warning regime, the acquirer must promptly file further news releases and early warning reports upon:
- the acquisition or disposition of each additional 2 per cent or more of the outstanding class of voting or equity securities of such public company;
- the holdings of the insider decreasing below 10 per cent of the outstanding class of voting or equity securities of such public company; or
- a change in a material fact contained in the most recently filed early warning report in respect of such public company.
In addition, while an insider of the public company, the acquirer must, from time to time, report on SEDI any changes in its holdings of the class of voting or equity securities of the public company. Also, where the public company is the target of a takeover bid, the reporting threshold under Canada’s early warning regime decreases to 5 per cent.
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1 April 2020.